Daily Commentary BY THE CURVE TEAM –

Upbeat Fed Despite Yet Another Disappointing Data Reading

16th of October, 2017

The key piece of data over the weekend was the CPI inflation statistic from the US. The number undershot expectations, but interestingly enough, Yellen remained positive.

The Fed was looking for a strong number to bolster their case for a December rate hike. However, the number came through at 0.7% for the last six months, 1.4% as an annualised figure. The annualised figure is similar to what we have been seeing domestically but it’s interesting to see two completely different opinions on monetary policy action, in comparison to the RBA.

The RBA continue to employ a “wait and see” sort of attitude, waiting on concrete data pointing in a particular direction before acting appropriately. The Fed on the other hand, are seemingly desperate in their monetary policy normalisation stance, with Yellen saying just hours after the weak inflation data that the “soft readings will not persist”. Consequently, the futures market did not react as firmly to the actual data release, with the December rate hike still about a 75% chance (roughly 80% last week).

The weakness of the CPI number brought an immediate reaction to US bond yields with 10 year treasuries dropping from 2.33% at release to 2.27% as I write (see graph). The USD took a minor hit on the news as well and that lifted the AUD to 0.7879.

This week looks to be fairly quiet in terms of domestic data with the highlight being the latest labour market numbers. Whilst unemployment is low, the underemployment number is likely to remain on the higher side. This won’t help improve the inflation and growth readings that the RBA is seeking to bring the annualised figure back into their 2-3% target band. Maybe then we will hear a more valid argument for a change to the 1.50% cash rate.

James Winder

Client Relationship Manager